Debt is a way of life for most Americans, some of it good, much of it bad.
Let’s start with a positive spin: Handled responsibly, debt can be the impetus toward great investments in homes and education, serving as a key economic engine. In other words, if you used credit to buy a home and get a college education, you are on the good side of debt.
Then, there is the bad side.
Debt among U.S. consumers is escalating at a dangerous pace, putting younger generations at a financial risk that was never experienced by their parents. It usually starts with irresponsible use of credit cards and grows worse as unforeseen circumstances like unemployment, medical emergencies or unforeseen changes in a family situation come into the picture.
According to a study by the Pew Charitable Trusts, 69% of American consumers view debt as a necessity, but prefer not to have it. Meanwhile, 85% of Americans believe that others use debt to live beyond their means. Despite that apparent disdain, the debt load for Americans keeps rising.
The Federal Reserve says that the average household debt is up to $132,529 (including mortgages) a jump of 11% in the past decade. Credit card debt and auto loans are climbing over the $1 trillion mark. Student-loan debt has hit a staggering $1.3 trillion with 44.7 million borrowers, who owe an average of $37,172. That figure alone is up 186% in the past decade!
The obvious reason that debt keeps rising is simple: Household income is up 28% in the past 13 years, but the cost of living has increased by 30%. In other words, we’re not making enough money to cover the expenses we take on.
Beyond keeping up with daily expenses, irresponsible spending has taken a toll. The path to a credit crisis is paved through restaurant bills, designer clothes and vacations at five-star hotels. Many families, even with a well-meaning financial plan, don’t pay close attention until the hole gets so deep, there is no way out.
They need solutions.
Where to Find Credit Card Debt Relief Programs
Fortunately, there are several methods to reduce credit card debt – and maybe even eliminate it – in a consistent and logical manner. This can be done on your own, if you have discipline, but it’s often beneficial to partner with financial professionals, who can negotiate lower rates with lenders, refinance homes or create budgets that keep you on the right course.
Debt Relief Pros and Cons
If you’re floundering financially and can’t figure out how to deal with rising debt obligations, consider the pros available in the four debt-relief options:
- Most nonprofit organizations offer credit counseling sessions free, but be sure to check. Some agencies are for-profit and could require fees.
- Lower interest rates and monthly payments. A debt consolidation loan or debt management program should reduce the amount of interest you pay on your debt, plus get you a monthly payment that is more in line with your income. The stability of knowing that you have an affordable monthly payment that eventually will eliminate your debt can remove a lot of the anxiety associated with the problem.
- Credit counseling. Most businesses in the debt-relief industry offer free credit counseling services. Certified credit counselors help consumers build an affordable budget and learn how to live with it. Counselors teach them the debt-relief options available and offer advice on which one best suits their situation. This is an overlooked aspect of many debt-relief services. It increases the financial literacy of consumers by leaps and bounds.
- Reduced amount of debt. It’s possible a lender may forgive as much as 50% of your debt, if you have the resources to handle that much immediately. Lenders want to get paid something. They would prefer getting paid all of what is owed, but they recognize that when consumers are drowning in debt, sometimes it’s best to throw them a life raft.
- A chance to start over. The anxiety of dealing with debt everyday crushes people’s spirits. Choosing the debt-relief option that gives you a way out of debt is a life-changing experience. Nothing feels better than second chance, an opportunity to right the wrongs and prove you’ve learned from experience. Bankruptcy, despite its reputation, will do that. A successful Chapter 7 or Chapter 13 bankruptcy breathes life back into consumers. It brings hope that the lessons you’ve learned about finances can take the stress out of your life.
- Stops the collection calls. If you haven’t settled your debts in 180 days, the lender probably will sell it or turn it over to a collection agency. That could be the start of non-stop calling to get you to pay. Enrolling in a debt-relief plan will stop the calls.
The negatives involved in debt-relief services extend a little further than most consumers realize and that is the reason anyone considering this route should research an option thoroughly before committing to it.
Here are a few of the cons when seeking debt relief that should be taken into consideration:
- Time frame of 3-5 years. There is no instant fix with any of the debt-relief options. It is prudent to allow 3-5 years and optimistic to think you can do it less time. It takes discipline, commitment and time to eliminate debt.
- No guarantees. Lenders usually want to work with you, but they can choose not to. This is especially true with debt settlement. You may contribute to the fund used to make a settlement offer for 6-8 months and then find out the lender won’t accept the offer. If you choose this route, be sure to get a written agreement from the lender that they will work with you.
- Fees for services. Regardless of which form of debt relief you choose, there will be a fee to the company providing that service. The fees for debt management are part of your monthly payment. The fees for debt settlement are based on the amount of debt you have. Lawyers’ fees for bankruptcy vary. That just adds another layer of debt that you will have overcome.
- Late fees and other penalties. If you are not actively paying down your debt, the lender will assess late fees and raise the interest rate so that your debt actually grows. Again, this applies specifically to debt settlement, but could happen with late payments in either a debt management program or debt consolidation loan. Be aware that not making at least minimum payments on your debt each month is going to cost you.
- Tax man awaits. If you have debt forgiven, that probably will count as taxable income and should be reported on your federal income taxes. The lender who forgives the debt should send you a 1099-C tax form detailing how much the original debt was and how much was forgiven. For example, if you owed $25,000 and had $10,000 forgiven, you would have to claim the $10,000 as income on your taxes.
- Credit score takes a beating. This definitely will happen with either debt settlement or bankruptcy. Even if you eventually reach a debt settlement with a lender, there will be a note on your credit report for seven years that says you missed payments and settled for less than what was owed. Chapter 7 bankruptcy stays on a credit report for 10 years and Chapter 13 bankruptcy is there for seven years. This will make it difficult to get a loan for a home or car at an affordable rate.